Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Nick Shenton. He is Manager of the Artemis UK Income Fund. Hello.
Nick Shenton: Hi, Holly.
Black: So, you've got three stocks for us today, all UK-based. Where would you like to start?
Shenton: Well, let's start with one which has been in the portfolio for seven years that we rarely get asked about and rarely have the opportunity to talk about.
Black: So, you're forcing me to let you talk about it.
Shenton: Exactly, yeah. I'm going to make the most of this opportunity.
Black: No one else will.
Shenton: And that's LSE Group, which might be better known as London Stock Exchange. And the secret behind that is, it's not really a stock exchange. It's much cleverer than that. So, the business is actually a provider of infrastructure for financial markets on a global basis. To put it more simply, technology is good for LSE Group because it can do more things for more people. And they've really benefited from that in recent years. They're also moving deeper into data through the acquisition of Refinitiv, and we like that move, because we see a pattern that we've observed in other companies that have been good investments for us, like Wolters Kluwer or RELX, and that is, using data to produce better outcomes for businesses to help them make better, more informed decisions. And we just see that as a structural growth market.
Black: Okay. So, as well as it taking over our companies, which expands its capabilities, it's also been the subject of takeover bids. So, does that enhance the investment case for it?
Shenton: Yeah, it seems to come along at least once every two years that LSE Group is bid for involved in M&A. So, Hong Kong Stock Exchange actually bid for LSE last summer at a high price than the shares currently trade, and we think they were right to turn down the bid. But it does to us highlight the attractions of LSE as being a world-class actually quite unique asset sat right here in London.
Black: Okay. What's stock number two?
Shenton: Stock number two is perhaps a bit more recognizable for income investors, and that's Secure Income Investment Trust. So, that does what it says on the tin. It is all about secure income, which is very much our bread and butter. We say our holy grail is a 4% dividend yield growing at 5%. And that's broadly what Secure Income offers.
Black: So, what does it hold?
Shenton: They know UK property very well, and they've avoided all of the structurally challenged areas like shopping centres. Instead, they've gone from more defensive long duration assets, like private hospitals or theme parks. So, Thorpe Park is one of theirs as is Alton Towers.
Black: That's a great thing to own.
Shenton: It certainly is. That will still be around in 20 or 30 years.
Black: Okay. What's our final stock?
Shenton: We understand there are structural pressures, certainly for a large amount of ITV viewing, because in 10 years' time people will probably consume TV as apps rather than through set-top. And also, we understand the pressures from Netflix, et cetera. But a couple of things that really intrigue us about this, firstly, what we are hearing from a number of companies, and this is advertising agencies, companies that advertise themselves is that their industry has gone too far to using Google to access customers.
That's what they call targeted marketing where you think you're going to get a deal. And they've been under-investing in brand building. And if you don't believe us, just look at something like Love Island and who's advertising on it. It's Amazon; it's Spotify; it's Netflix. So, the big internet players acknowledge they need to build their brands. So, that might be undervalued. And the second point that really surprised us, to be honest, was actually how much ITV have been investing in technology to create more value for their customers and advertisers. So, at 5.5% dividend yield and 12 times its cash flow we think ITV could actually be an interesting survivor of technological threat turning into opportunity.
Black: Well, thank you so much for your time.
Shenton: Thanks for having me.
Black: And thanks for joining us.
